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Your Personal Credit Score’s Impact on Your Business

Your Personal Credit Score’s Impact on Your Business

For business people, who are uninitiated in the ways of personal credit as it affects your business, this is blog is for you. It will discuss personal credit as it relates to sole proprietorships, LLCs, and corporations. It will also discuss your personal credit score’s impact on your business. This includes to what extent, as well as what makes up a good credit score.

We want to begin with the type of business you’ve chosen for your operations, and how each business type affects an owner’s personal credit or not.

Sole Proprietorships

A sole proprietorship is not considered a legal business at the state level, and therefore is not registered with the state as a legal business. Business credit is not used for a sole proprietorship, only personal credit, which becomes your business credit.

Creditors don’t view your business expenses apart from your personal expenses. So, if your personal credit score is below average, lenders will not be so keen to hand out business loans. If they do, they will charge a higher interest rate than if your credit were in better shape. They may also raise your credit limit or open new lines of credit for you.

Even though you can submit an application for a business credit card or a business loan, they will not be opened under your business’s name, only under your own name. This puts the onus on you to pay your debts. To put a fine point on it, your business is not liable for debt burdens, you personally are.

Your personal credit score, which is also your business credit score,will be affected by any late or skipped payments. If you suffer from bad credit, lenders will be loathe to give you any new loans. Or if you’re fortunate enough to be approved for a new loan, it will come with higher interest rates. You can look to your poor credit score and payment history as the reason lenders turn you away for new or more credit.

LLCs

A limited liability corporation (LLC) is not as affected by your personal credit. LLCs are legally known as “pass through entities”. In this instance business finances are reported separately from your personal finances on your income tax. Don’t use your social security number, used for sole proprietorships. Instead, your LLC can file under a business tax ID, the Employer Identification Number (EIN), using Schedule C.

Using an EIN your business becomes a separate entity and creditors will be examining your business tax return, and sometimes your income statement to base their decision on whether to grant you credit.

In this case, it is key to separate your business finances and not lump them in with your personal finances.

Corporations

Corporations like LLCs use an EIN to file taxes and can own personal bank accounts and credit cards. But when you submit an application for new credit or loans the lender can consider your personal credit as part of doing an assessment of the business and its solvency or lack thereof.

Business Credit Score vs. Personal Credit Score

To get down to it, let’s find out what makes a good business credit score, because it operates differently from a personal credit score.

A business credit score departs from a personal credit score in that the business credit score is not standardized like the FICO rating system that rates credit from 300–850

Instead, the rating scales for credit scores vary according to the particular business credit bureau. Experian’s business credit rating Intelliscore Plus ranks credit scores 1–100. Equifax’s Small Business Credit Risk Score for Financial Services’ system ranks business credit scores 101–992.

Ensure your business credit score is acceptable to vendors, manufacturers, as well as lenders. To do so, get them acquainted with the business credit bureaus serving them. Learn more about business credit scores and how some business credit bureaus rank credit.

Three Rules to Follow for Good Business Credit

Some basic principles apply to achieving and maintaining good business credit.

  1. The simplest and most important rule to follow in getting a good credit score to pay on time, with no excuses for late or skipped payments. If you don’t, your credit will be damaged before you know it.
  1. Use your credit wisely. Take on as much as you can reasonably manage because lenders will look upon your company as a good credit risk. But don’t be foolish and get in over your head.
  1. Trade credit provided by vendors, suppliers, and manufacturers is extremely important. Making payments on time will grease the wheels for a rewarding relationship whenever you need their goods, products, and services. And will help to keep your credit score strong and healthy.
good-credit-score-in-your-20s

How to Get a Good Credit Score in Your 20s

How to Get a Good Credit Score in Your 20s

If you’re in your 20s, now is the time to charge forward and work towards a good credit score. Far too few people in their 20s give any consideration to a credit score let alone the steps necessary to acquire credit. However, the foundation you build early on will carry on for the decades to come, from when you purchase a car to when you apply to rent an apartment.

Tips for a Good Credit Score in Your 20s

Ensure rent payments are on file

When you first start renting, encourage your landlord to sign up for electronic payments so that each of your rent payments will be on file. Do this even if you’re using someone like a parent to be your cosigner.

Turn on automatic payments

Sign up for automatic payments when you pay things like your electricity bill or your health insurance. By setting up automatic payments, you can avoid any type of late payment.

Pay bills on time

Following the second point, pay all credit card bills on time. A credit card is not meant to be used as a way to pay for things that you cannot afford. When you’re in your 20s, your interest rate on your credit card is likely to be very high. This is because you have little to no credit history. Don’t fall into the credit debt trap, which can quickly spiral out of control.

Use your credit card wisely

Use your credit card to pay for the things you would purchase anyway. One such example is to set up your regular bills like Internet, cell phone, or electricity. You can pay them with your credit card each month and then immediately pay your credit card bill that same month. This gets you double the credit, so to speak, because it shows that you paid your all your bills on time.

Beware of the fine print

Understand the fine print of your credit card. Make sure you don’t accept any additional services or fees that you don’t understand or want. If you aren’t 100% aware of what you are agreeing to, you might end up with $60 per month in service fees for services you don’t need. This is where many young adults get into trouble. They might leave the credit card in their pocket thinking that it’s something to save for a rainy day or an emergency. In such cases those regular monthly fees add up.

Create a budget

Create a budget, and stick to it. At a simple level, if you’re making more money than you’re spending, then you’ll be able to achieve a good credit score in your 20s. By having a budget, you can ensure that you’re always in the black, not the red.

Why establishing credit in your 20s is important

It’s important to realize why getting a good credit score in your 20s is a good thing. The other way to ask this question is: what happens if you don’t? This is detrimental in three ways.

Build credit

The first is that you’ll miss out on the opportunity to build imperative credit. Usually when you’re in your 20s, you might have some in helping you out to get a car. Or, you live in student housing paid by your parents. In all these cases, you might fail to learn why your credit is important. However, once you no longer have a crutch to lean on like your parents’ wallets, your credit score will be used to judge your worthiness to take out loans or to rent a new place.

Avoid mistakes

The second way that it hurts you is if you make mistakes. Many credit-based mistakes, like not paying credit card bills regularly and letting your credit card go to collections, will haunt you for 10 years. These “small” things can severely hurt your credit score when you set out into the real world and try to get your first car, or even get a job. Though it’s possible to repair your credit score, it’s much easier to avoid these mistakes in the first place.

Help your job search

The third way is that it can impact getting a job. Today more than ever before, companies check the credit score of the people they might consider hiring to determine if they are responsible. This is particularly true if you want to get any job related to finance. Even an entry-level position like that of personal assistant or legal secretary might task you with the responsibility of verifying different receipts, keeping track of payments made in a ledger, something which requires you to handle financial data.

Takeaways

Ultimately, it’s important to realize the seriousness of establishing a good credit score in your 20s. Even more fundamentally, you’ll develop solid personal finance habits that will carry you for the rest of your life.

women-credit-score

Achieving a Good Credit Score May be Harder for Women

Achieving a Good Credit Score May be Harder for Women

It’s hard to believe today that there was a time when women could not apply for credit on their own. Believe it or not, their husbands needed to sign the credit card application before a woman would be issued a credit card! It wasn’t until 1974 that women were able to take charge of their own financial affairs. The Equal Credit Opportunity Act of 1974 gave women the right to apply for credit independent of their spouse’s approval.

Even though women are now empowered to handle their finances, inequities still exist between men and women regarding three areas of financial parity: employment, retirement savings, and credit stability.

Employment Issues

The American Association of University Women (AAUW) issued a report in the fall of 2016, which shows American women still earn less than men. The difference is drastic: women earn 80 cents for every dollar a man earns.

Women’s lesser status as bread winners doesn’t stop at pay inequity. Their role as primary caregivers of both children and aged parents is looked at as a disqualifying factor when it comes to handing out promotions.

AAUW’s report revealed employers are not as prone to giving women leadership roles. The employer’s assumption is women aren’t capable of handling senior positions of authority due to childrearing and elderly dependent care responsibilities. According to Career Services Manager, Lisa Andrews, PhD, “Women are definitely called upon to be more flexible…it can create all kinds of difficulties in the workplace.”

So working women find it tough to find harmony between home and work responsibilities. Women run the risk of being denied a job promotion. On the other hand, men with families go on to get fatter paychecks and climb the corporate ladder faster.

Retirement Planning

The difference for women generally gets worse with age. In general, the pay difference increases as women climb the ranks to mid- and upper-level management. This leads to a bigger difference in financial security for older women versus men.

Consumer advocate, Eleanor Blayney of Certified Financial Planning Board of Standards relates to this. “The probability is extremely high for women [that] they will be single in their retirement years.” Because financial planning is an area is which women have been undereducated, this cripples their resolve to put away funds for retirement.

Society didn’t trust baby boomer women and their mothers to be able to comprehend investment strategies. Women may have handled the bill paying, but beyond that, it wasn’t expected of them to have knowledge of financial instruments. Understanding CDs, mutual funds, IRAs, money market accounts, or other various tools of investment were above their understanding, supposedly. This necessary skill would have helped them to save for the long years of retirement.

For the modern woman, their outlook is better, but with the pay gap and investment strategies geared towards men, retirement planning may still be difficult. Women on general do have a different salary peak and longevity. Ellevest is an robo investment advisor geared towards women, taking these differences into account.

What Steps Can You Take to Gain Financial Stability?

  1. Apply for jobs at companies with an equal opportunity employment policy. The Financial Services Gender Equality Index is a list of financial firms that have committed to advancing the careers of women employees. The National Association for Female Executives also has a list of companies that seek to hire women for upper-level management jobs. They also list companies that offer flex-time work schedules and the opportunity for advancement.
  2. Make educating yourself about investing a top priority. Learning how to invest is challenging but necessary if women want to control their financial lives. Certified financial planners (CFP) are in the business of educating you, having your best interests front and center. They are obligated to do so under their CFP certification.
  3. Build a credit history apart from your partner’s, establishing accounts in your name only.
  4. Build and maintain an a-one payment history. Never pay late or skip a payment. It will damage your credit score significantly; 35% of it is based on your payment history alone.
  5. Limit the amount of debt you carry. Financial professionals suggest you maintain recurring credit balances at 30% of your credit limit. And if you can swing it lower than 10%. To give an example of how this works, let’s say your credit limit is $8,000. At 30% that would come out to $2,400; at 10% $800. The best way to control your spending is to pay off your credit card balances each month, saving on the interest charges as well.

Parting thoughts

Unfortunately, women still suffer from gender bias when it comes to pay equity, child and family leave. These lead to obstacles for career advancement. However, they can begin the journey toward financial security. For instance, peruse the lists provided by The Financial Services Gender Equality Index and The National Association for Female Executives. Begin catching up with men in earning equal pay, invest intelligently, and learn the credit game.

Mortgage Affects Credit Score

How Getting a Mortgage Affects Your Credit Score

How Getting a Mortgage Affects Your Credit Score

Having a good credit score is important for major life purchases like mortgage. But what a lot of people don’t realize is the reverse: getting a mortgage affects your credit score. Here’s why.

Each credit score inquiry and loan application may hurt your credit score, so many people wonder whether getting a mortgage is actually good for them. This is not an unwarranted fear. However, the degree to which you worry might be unwarranted.

Overall, there are some potential negative ramifications. Getting a mortgage affects your credit score. At first, you may see a small decrease, but over time your credit score will rise beyond where you started.

What your credit score is made out of

First, it’s important to understand that your credit score is made up of five areas:

  1. Payment History (35%) Whether you pay your bills on time and how much you pay them off every month.
  2. Debt (30%) How much debt you have versus the credit limit and original loan amount.
  3. Length of Credit History (15%) Based on your age, the age of your accounts and the age of each individual account on your credit report.
  4. New Credit (10%) If there’s any new credit such as a newly opened credit account.
  5. Credit Mix  Lenders want to see that you were able to handle many types of credit responsibly. Having a good mix of credit including an auto loan, credit card, and a mortgage will help.

 

How your mortgage may lower your credit score

The mortgage itself will add a credit application inquiry to your new category credit. Once you have a loan, it will count as a new account. Only inquiries from the past year are considered with your credit score. So, that negative impact of checking your credit won’t last for very long.

You might be worried about these inquiries, because naturally you’ll want to shop around to find the best interest rate. There’s a special rule for this particular case. If you apply for more than one mortgage in a two week timeframe, so as to find the lowest interest rate, it only counts as one inquiry. Therefore, you don’t have to worry about shopping around trying to find the best rate. Just make sure you do it quickly within those two weeks.

The new mortgage will also hurt the category of “length of credit history.” So, at first, the mortgage will likely lower your credit score. However, the mortgage will eventually it will look like much less of a new account.

How your mortgage may increase your credit score

For all that negativity, there are also positive impacts, particularly long-term. In fact, getting a mortgage can help all five categories that comprise your credit score.

Provided that you make every monthly payment on time, your payment history category will start to take care of itself. With time, the amount you open your mortgage relative to the original amount you borrowed begins to lessen.

What’s more, with time the mortgage starts to become more of a positive factor in your length of credit history category. It will not stay in the new credit area for very long. Finally, if you’ve never had a mortgage before, getting a mortgage for the first time I have an immediately positive impact on your credit next category. While this category does only account for 10% of your total credit score it can still help you.

Parting thoughts and takeaways

The only way to know how your credit score is going to be impacted is to know what the formula for your credit score is. You might find that on average, your credit score dropped by 20 points when you first buy a home. Yet, it will start to rise after the first few months. After one year, your credit score will more than likely be higher than it was before you took out the mortgage. The reason for this is that, as discussed, the negative impact is immediate but after the first year or so all that negativity becomes a more positive impact.

That said, the most likely impact on your credit score when you take out a mortgage will be minimal but negative at first. With time, it will become much higher and much more positive. As a result, the overall long-term positive benefits will surely outweigh the short-term negative impact. If you’re still worried, you can speak with a credit specialist from a reputable credit repair company. They will be able to assist you in determining how your credit score will change after taking out a mortgage.

Things Affecting Credit Scores

7 Things That Don’t Affect Your Credit Score

7 Things That Don’t Affect Your Credit Score

Your credit score can seem like one of the most ominous of numbers in your life. With a bad credit score, it is something that hangs over your every move. However, there’s no reason to stress in every situation. Here are 7 common things don’t affect your credit score, for better or for worse.

1. Bank overdraft

If you’ve ever suffered from a bank overdraft fee, you know how expensive it can get. This is especially true if you receive many overdraft fees. It can be overwhelming, but the good news is that overdraft fees don’t move your credit score at all. There’s just one important thing to note. You have to ensure that the fees are paid off, so that the fees aren’t sent to collections. Understand though that if the overdraft fee is not paid after many weeks, your bank will send your account to a collection agency. Then, that debt collection itself will hurt your credit score.

2. Paying for insurance

Insurance companies perform a credit check when they decide if they want to give you insurance and when they calculate the insurance premium you pay. But although they’re using your credit score to make a financial decision, they don’t actually report your payments to credit bureaus. So, your insurance doesn’t change your credit score either. So, if you’ve been making timely insurance payments every month without fail, you’re unfortunately not reaping any credit score benefits.

However, much the same as an overdraft, if you missed too many of your insurance payments and the company have to send it to collections after they have canceled your policy, then it does negatively impact your credit score.

3. Paying your phone bill

Much the same as an insurance company, phone providers will look at your credit score prior to offering you a service. These phone providers often don’t give your bill payment history to the credit bureaus. They only want to see how much they should charge you as interest. Your credit score is not aided by timely bills either. So, even if you pay your cell phone bill on time every single month, it will not help your credit score at all.

But of course, like all things, if you stop paying your bills and it has to be sent to collections, the collection agency will report back to your credit score it will cause your credit score to drop.

4. Checking your own credit score

When a company looks into your credit, such as when they verify your credit in order to give you a loan, this inquiry counts against you for the first year. Every time somebody inquires for your credit score, it negatively hurts your credit score. That’s why it’s recommended that you don’t apply for multiple credit cards over the course of one year. On the other hand, you can check your credit score as often as you want. Using a legitimate third-party, you can check your credit score regularly and it won’t drop by a single point.

5. Rent payments

In most cases, your rent does not count towards your credit score. For anyone who doesn’t have a mortgage yet or is trying to repair their credit score so they can get a better loan rate on a mortgage, this might come as bad news. Naturally falling behind on your rent doesn’t hurt your credit score and your ability to get any loan in the future.

Also, you can ask your landlord to report your payments to the Experian rent bureau. This is the only aspect of rental payments which could help you with your credit score. Having this agreement set up online is a very beneficial way for you to build back your credit.

6. Credit counseling

Many people falsely believe that credit counseling affects your credit poorly, just like filing for bankruptcy. This is not true. Credit counseling appears in your credit report as an annotation but it doesn’t actually impact your score. If you are using a credit counselor to manage your credit card payments, just make sure that the creditor is making timely payments. Irony aside, if you have a credit counselor helping you and they make late payments on your behalf it will hurt your credit score.

7. Child support and alimony

Unless you fall behind on your payments and everything has to go to collections, child support and alimony payments do not affect your credit score one way or the other. However, what the other implications are of not providing child support and alimony is another story.

Summary of actions that don’t affect your credit score

Here’s a brief recap of the 7 things that don’t affect your credit score:

  1. Overdrafting your bank account
  2. Insurance payments
  3. Phone bill payments
  4. Checking your own credit score
  5. Rent payments
  6. Getting credit counseling
  7. Child support and alimony payments

For more tips, you can go to one of the best credit repair companies to seek professional help in fixing your credit score.

How credit scores are used: for example, to take out a home mortgage.

How Credit Scores Are Used

How Credit Scores Are Used

Understanding how credit scores are used is important for financial and life planning. From applying to credit cards to home mortgages to paying for school, credit scores are used in a wide variety of functions.

Why Are Credit Scores Used

Simply put, lenders want to do business with people who have a history of being responsible with their debt obligations. The three-digit number can affect how lenders do business with you in three main ways:

  • Whether you’re someone they’d like to business with
  • How much it will cost to do so
  • Which options lenders will offer you

Why are credit scores used as opposed to a different way of analyzing responsibility with debt obligations? Here’s a before and after of credit scores:

Before Credit Scores

Lenders used the applicant’s credit report to choose whether to grant credit before credit scores. A lender might have denied credit based on a subjective judgment. This method may have also been time consuming and subject to mistakes.  Lenders may have made decisions based on personal opinion rather than whether the applicant was able to pay back the debt.

The Emergence of Credit Scores

Credit scores started being widely used in the 1980’s. Credit scores help lenders calculate risk more fairly because they’re more consistent and objective. Your credit score simply reflects how likely you would repay debt responsibly, no matter who you are as a person. Credit scores are now dependent upon past credit history in addition to your current credit status.

Credit scoring 101

How is my credit score calculated?

The information that impacts a credit score differs based on which score is used. Overall, your credit score is affected by factors in your credit report including the following:

  • The total number of late payments
  • The severity of the late payments
  • Account age, number, and type
  • Total amount of debt
  • Types and number of recent inquiries

How Your Credit Scores Are Used

If you’re looking into getting credit, the following are some things you should keep in mind:

Applying for Credit Cards

Companies usually look at your credit score as one of many factors in figuring out whether to approve your credit card application. The formula each company uses is a heavily guarded secret.

  • The precise impact of your credit score will depend on which company is reviewing
    your decision
  • Your credit score may allow you to receive additional perks from a credit card company
  • Credit card companies can also use your credit scores to determine credit limits, interest rates, and other credit terms they offer you

Getting loans for school, a car, or a home

Many federal loans don’t look at your credit score. There are still some things to consider.

  • If you apply for a private student loan, however, banks typically are curious about your credit score and credit report history.
  • Your credit report and credit score also affect the loan approval and interest rate of the loan you’ll receive.
  • Auto lenders also look at your credit score to figure out if they will approve a car loan or lease.
  • Credit scores affect the interest rate in addition to the loan length.
  • The requirements for approval are usually stricter for mortgages.
  • Each lender will have their guidelines they’ll follow. However, it’s universal that your credit score is a significant data point that lenders will use.

Because of the latest housing crisis, some lenders may use the credit score as a higher factor in their analysis.

Other Situations

There are other situations where your credit score surprisingly plays a role.

  • Insurance companies are using credit scores to determine whether they want to provide coverage, how much they’ll cover, and how much they’ll charge.
  • This applies to home and auto insurance. When it comes to renting apartments, landlords often use credit scores to determine how much of a security deposit they may want from you.
  • If you need a payment plan to a buy a cellphone, companies may look at your credit score to figure out the type of payment plan options they’ll offer you and whether they’ll want a deposit.
  • Utility companies may take a look at your credit score to determine whether they want a security deposit from you and how much

How Credit Scores Benefit You

Finally, a way to understand how credit scores are used is to see how they benefit you and society as a whole.

Get loans approved more quickly

These days, the majority of credit decisions can be made in a matter of minutes. Credit scores allow department stores, websites, and additional lenders to make credit decisions almost instantly. Mortgage applications can be approved in a short-time frame hours as opposed to weeks.

Get fairer credit decisions

Things like gender, nationality, marital status, race and religion are not used in credit scoring. This allows lenders to be less biased and only focus on the relevant facts related to credit risk.

Credit mistakes are less important

Credit scoring doesn’t negatively impact you forever if you’ve had bad credit previously. More recent on-time payments will be in your credit report, while past credit problems fade away as time passes. Credit scoring takes into account a holistic view of credit-related information. Thus, your overall credit report is a much better view of your risk from the creditor’s perspective. This is in contrast to borrowers turning people down solely on a past problem in their files.

Obtain more credit

Credit scores gives lenders the confidence to offer credit to more people. This is because lenders have a better understanding of the risk they are taking on. Most lenders have their own individual guidelines. So, if you get rejected by one company, you can still get accepted by another. Instead of a simple yes versus no, lenders can offer a choice of credit products for different levels of risk. Credit scores allows lenders to identify more individuals to perform well in the future. This is true despite the fact that their credit report shows past problems.

Get lower overall credit rates

Automatic credit processes, such as credit scoring, allow for credit granting to be more streamlined and cheaper for lenders. The lenders, in turn, charge less for their service downstream to their customers. Lenders also control credit losses using credit scoring. This allows lenders to make rates lower overall. A great example is the fact that interest rates for mortgages are lower in the US compared to Europe. This is at least partially due to the fact that lenders have credit scores available to them.

credit-america

The Average Credit Score in America – And What You Can Learn From It

The Average Credit Score in America – And What You Can Learn From It

In America, the average credit score has gone up a few points, teetering at the edge of 700, according to the latest FICO data. This respectable score is up five points in 2015. While this could the result of a change to the FICO scoring method, it nonetheless offers a chance to review what credit really is, and why taking on debt can help you save money.

Today, while 43% of Americans have a delinquency affecting their credit score, for most of them, that delinquency is 17 months old. What’s more, the average American has used up to 15% of their available credit on things like credit cards, and they have a full six open revolving credit accounts all of which have outstanding balances. Why?

Understanding Credit

As the name suggests, credit is a form of paying it forward. Credit gives you money based on how likely you are to repay that money. For each line of credit you receive, whether it is a loan or a credit card, the interest rate you pay is based on how likely that repayment will be.

Treated as a business, the industry of credit is one that traps people in a race against time. Someone who might, for example, have the earnings to repay a car loan early and have the debt off their shoulders is treated to an early repayment fee. Early repayment fees are a way for companies lending funds to ensure they are still profiting from the loan. This is even if you are timely in your payments. Monthly bills when paid on time for things like a credit card do not acquire any interest. However, when they’re paid even one day late, they’re charged incredibly high fees. Things like mortgage loans have lower interest rates, but because the loaned amount is higher, the total accumulated each month. These loan amounts adds up quickly.

How You Get Scored

The unfortunate thing for many is that without a good credit score, getting reasonable rates for things like a home mortgage or other loans will be quite high. Starting off without any credit history means that in order to earn a good credit score, you have to take on debt, and then slowly, painfully, repay that debt.

Having the funds up front to pay for a lower end car in full earns you next to no credit, which means it does not help your credit score to rise, rather, keeps it steady, unchanging. As such, taking on a line of credit, even if you do not need it, is the only way to earn a higher score. Each month that a debt or line of credit is repaid, it gives you the chance to show that you can be trusted to repay a debt. The more months you repay on time, and the more things you repay each month, the more companies can rely upon you to give them the profits they are seeking with loans and lines of credit.

Increasing Your Score

So, if you have checked out your score for the first time, you might see that without any debt, without any credit checks, and without any credit cards in your name, your score is lower than the national average. In order to bring it up, you have to apply for and secure a debt against you, then slowly repay that debt.

When buying a new car, one way to do that is to pay a large enough down payment that your overall interest rate can be lowered in spite of an average or below average score, then make monthly payments on the rest. Both things work in your credit score’s favor.

Why Improve?

In the case of a credit score, you should not settle for a “fair” report, or whatever figure you have. Reason being, better credit scores save you money long term. Consider that you want to buy a house. If you are getting a thirty year fixed rate mortgage at a rate of $250,000, your credit score translates into direct savings. Consider the charge below:

FICO ScoreAPR (%)Total Interest ($)Difference vs. Top Tier
760-8503.909%$174,966N/A
700-7594.131%$186,499+$11,533
680-6994.308%$195,807+$20,841
660-6794.522%$207,194+$32,228
640-6594.952%$230,503+$55,537
620-6395.498%$260,897+$85,931

DATA SOURCE: MYFICO.COM

Illustrated here, the higher your credit, the more money you save in total interest.

What to take away

What’s important to understand is that you are not alone. No matter what fiscal issue is keeping your score down, even the top score holders have the same issue. In fact, the average “high achiever”, those with a score over 800, have nine open revolving lines of credit. This is three more than average. Given the aforementioned credit information, it makes sense that higher score earners are using more lines of credit and debt to their name. This allows them to make more payments on time, thus cementing the notion that they are “good for the money”.

Most people do not realize that 30% of the FICO score is taken from amounts owed on credit lines. As such, the higher achievers often use just 4% of their available credit. On the other hand, compare this to the 15% for average score holders. While 43% of Americans have a delinquency on their report, 5% of higher achievers do too. Average Americans have 100% of their accounts with an outstanding balance, while higher achievers have but 70%.

Overall, the same fiscal issues are faced by all. The difference is in their impact or severity. Paying bills on time, not using all of the credit you have available to you. In conclusion, not letting accounts get sent to collections all work in tandem will improve your score.

new years resolutions

How To Improve Your Credit Score In 2017

How To Improve Your Credit Score In 2017

The New Year is a great time to set new goals, and it gives people the fresh start they need to make the changes they desire. At the beginning of each year, around two-thirds of Americans vow to make their lives better by having a New Year’s resolution. Out of those two-thirds, only 8% achieve their goals. Improving credit scores and getting out of debt is among the most popular resolutions each year. With so many people desiring to improve their credit scores, why do most fail? The answer is that most goals fail without having a concrete plan in place. If improving your credit and getting out of debt is one of your resolutions this year, having a roadmap ensures you will improve your credit score in 2017.

A credit report is simply a compilation of information obtained from lenders that an individual has used. The information in a credit report determines your credit worthiness as a borrower. In a nutshell, a credit report is a measuring tool to analyze how a person manages debt and their likelihood of repaying a loan. A credit report also depicts a person’s spending behaviors. Debt to income ratios could indicate if a person is spending more than their ability to pay.

Credit affects many important areas in life. Everything costs more with poor credit scores, which often makes it even harder to improve your credit score. While resolving to improve your credit score may not be the most glamorous New Year’s resolution, it may be one of the most important. The financial freedom and self-discipline that comes from seriously improving your credit score will be an investment you cannot afford not to make. Here are the steps to keep your resolution and improve your credit score this year.

1. Take an honest assessment of your credit

The first step in improving a credit score is to know exactly what needs improvement. In order to make an effective get out of debt plan, take some time to understand your current credit situation. Set aside a day and time that you can truly delve into your finances to create a plan.

A crucial part of improving your credit score is being honest with yourself. One of the most overlooked steps in improving credit is understanding your own behavior with money and debt. Use credit card statements and bank statements to track spending habits. Did an emergency arise that caused you to max out a credit card? Maybe an unexpected car repair, loss of income, medical situation, or natural disaster forced you to use credit cards more than you would have liked. Perhaps impulsive spending led you to high credit card balances. However you ended up with credit card debt, it is wise to learn from it, so you could plan for the future. Having a savings account to handle life’s emergencies can protect your credit score and your wallet.

Credit card debt does not always signify a money issue. It’s often a behavioral issue. Changing behaviors and relationship with money will not just propel you to improve your credit score, it ensure that bad habits will not surface again once your credit goals have been met.

2. Clean up your credit report

According to the FTC, millions of people have errors on their credit reports that can result in a lower score. Carefully check your credit report to ensure all information is being reported accurately. Once a year, you can obtain a free copy of your credit report from all three credit bureaus. If you suspect fraud, inaccurate information, or need to update your personal information, you can contact the credit bureaus individually to find out their dispute process.

To find out where to obtain a free copy of your credit report, check out our blog post on how to get your credit report and credit score for free.

Professional credit repair companies can help you clean up your credit report. However, it’s important to choose the right one, since many credit repair companies are ineffective scams.

3. Understand how credit scores are calculated

Many people have lower credit scores because they do not understand how it is calculated. Depending on your situation, aiming to eliminate all credit card debt may not be possible in one year. Around 30% of your credit score stems from credit card balances. Aim to reduce the debt to income ratio by paying off 20% or more of credit card balances.

Another credit score buster is applying for too much credit in a short period. Apply for credit only if it is absolutely necessary. 10% of a credit score is calculated by the number of hard inquiries. Another 15% of a credit score is determined by the age of the accounts. Having too many new accounts or inquiries could put a significant dent in your score, so avoid opening new lines of credit if possible.

4. Change spending habits

Knowing how to allocate your income will be a beneficial asset during this process. Is there something you can sacrifice to get to your credit goals faster? Maybe skipping your daily latte for a short period or avoiding take out lunches will speed up the process of paying off a credit card or increasing your emergency fund. It is wise to be mindful of how money is spent. Small purchases here or there may seem fine, but they eventually add up quickly. Look for ways to be smarter about money and use the savings to improve your financial health.

5. Be responsible with the credit you already have

To successfully improve your credit score this year, you will have to take care of the credit you already have. Establishing a history of paying bills on time will be viewed favorably and will have positive impacts on your credit score. If paying bills on time has been a struggle in the previous year, commit to paying bills on time this year. It is vital that all payments are made on time, every time. A late or missed payment can stay on your credit report for up to seven years. A person with an excellent score could potentially lose around 90 points because of a missed or late payment.

If you think you will be late with paying your bill, do not wait until the last minute to contact the lender. Contact the creditors right away and set up alternative payment arrangements. Most creditors and banks have automated payment options available to make paying bills on time easier.

6. Adjust expectations and work hard

While “improving credit” and “getting out of debt” are some of the most cited New Year’s resolutions, they are often the ones people break the quickest. Like many resolutions, improving credit scores takes hard work, patience, and a change in behavior. These things normally do not happen overnight. Create a realistic budget and stick to it. This will keep track of bills and spending habits. Wallethub.com suggests breaking credit goals down into smaller goals to maximize your ability to follow through with your plan. For example, setting a deadline to order credit report, increase emergency funds, and create a budget could be mini-goals that pushes you closer to your ultimate goal.

Concluding Thoughts

Everyone could benefit from analyzing their credit reports and spending habits. Surprisingly, the most effective way to improve a credit score is to change your mind set about credit and money. By understanding your previous credit pitfalls, you can work hard at eliminating them. A healthy relationship with money, hard work, and perseverance will eventually translate to excellent credit. This year, resolve to investing in yourself by improving your credit score.

Credit report with credit score

How to Get Your Free Credit Report And Credit Score

How to Get Your Free Credit Report And Credit Score

Your credit score can affect your financial life in many ways. It can change the rate you get on a mortgage, the likelihood of credit card approvals and even the application for your dream job. In addition, reviewing credit reports and credit scores may help you detect signs of identity theft on time.

People sometimes get confused and think that credit reports and credit scores are the same thing. Here is what you need to know about both of these terms:

A credit score is the numerical value calculated from information in your credit file. In other words, it is a “grade” of your creditworthiness. This score changes over time so it can accurately reflect your current financial behavior.

On the other hand, a credit report is a brief picture of your financial reliability: mainly your history of paying debts and other bills. In addition, they include information like number and types of accounts you have, collection actions outstanding debt, your accounts age, among others. It is worth noticing that your credit score is calculated from the information of your credit report.

It is useful for you to have access to both reports. Let’s start first with how to get your free credit report.

How To Obtain Your Free Credit Report

According to federal law, you have the right to ask for a free credit report every 12 months from each of the three nationwide credit report companies: Equifax, Experian and TransUnion. Following these easy steps you will get your report online very quickly:

  • Go to annualcreditreport.com.
  • On the home page, click on the red button “Request your free credit reports”
  • Complete the 3 steps highlighted in the page:
  1. Fill out the form (one for each of the 3 reports you would like to get)
  2. Pick the report you would like. Remember you can choose a report from one, two or even the three credit report companies.
  3. Request and review your reports: To do so, you will need to answer some more questions. They are supposed to be hard and you may even require your records to answer them. After getting your reports, it’s advisable to print them so you can check at them later.

If you don’t feel comfortable with the online request, there is always the old-fashioned way: just call 1-877-322-8228. You will need to provide some basic information about yourself such as your name, address, social security number, and date of birth (in order to verify your identity).

After reviewing your reports, if you see something strange and would like to dispute information, place a fraud alert or if you have a specific question, contact directly the credit agencies via online or by phone:

How To Obtain Your Free Credit Score

Before showing you the ways of obtaining your free credit score, you should remember the pre-conditions you must meet in order to have a FICO credit score (the most used credit scoring system):

  • Have at least one account opened for 6 months or longer
  • Your account has been reported to the credit bureaus within the past 6 months
  • Have no indication of being deceased on a credit report

If you have ticked all the previous “boxes” and are in compliance with all the prerequisites, you can start searching for your credit scores.

Below you can find some free and reliable sources to get your scores:

MyFico

MyFico is the consumer division of FICO, the creators of the score methodology 25 years ago. Although it does not provide your actual credit score for free (it charges $30 per month for the full service), there is a Fico Score estimator on its website. It could be useful to get an easy and quick estimation of your score. All you have to do is answer around 12 multiple choice questions related to your credit history such as:

  • How many cards do you have?
  • How long ago did you get your first loan?
  • In the last 10 years, have you ever experienced bankruptcy, tax lien, foreclosure, repossession or an account in collections?

If you are clear about your credit history, you will be able to answer all of the questions and get your estimated score in less than five minutes. Remember: this is not your actual score, but if you responded the questions accurately then it will provide a decent estimation.

Freecreditscore

As it is part of Experia and it provides both a free credit report and score from this agency only. In addition, it provides 7 days a week support and no credit card information is required. You will only need to provide your personal information. Freecreditscore is definitely an excellent choice if you only want or need the Experia information.

GofreeCredit

There is a 7-day trial option that will provide you with your TransUnion credit score for free. After that, you will be charged $20 per month. You can cancel your membership whenever in those 7 days without any charge.

Freescoreonline

Freescoreonline offers a 7-day free trial membership that gives access to the three bureaus credit scores. After that, you will be charged $40 per month. Again, you can cancel your membership whenever in those 7 days without any charge.

Ask your credit card provider

An increasing number of people are now finding FICO scores on their monthly credit card statements (around 50 million now according to the Consumer Financial Protection Bureau). The Federal government has been encouraging card issuers to offer this service, and there is a new program that allows them to make it at no cost. Most of the biggest banks (Discover, Barclays, Chase, among others) are now providing this service for free and it is expected that most of the major banks will start doing it soon.

Tips

  • There are many ways to get your free credit report and free credit score. We recommend understanding first which source is best suited for you before start requesting the actual scores.
  • Sometimes a combination of two or three websites could be the way to go.
  • It is a good practice to look both at your credit reports and scores for consistency and complete information.
  • If you choose a “free trial membership” then you may want to create a reminder to cancel it before the paid-membership period starts.
  • If you want assistance in increasing your credit score, view the best credit repair companies. It’s important to choose a reputable credit repair company.
credit-score

5 Riveting Things You Probably Didn’t Know About Credit Scores

5 Riveting Things You Probably Didn’t Know About Credit Scores

Credit scores are a significant part of adult life. A person’s credit score can greatly affect how easy or expensive it is to buy a house, finance a car, apply for a credit card, or rent an apartment. Good credit makes all of those things a lot easier. And yet, there are many aspects of credit scores that many people don’t know but would be useful to ensuring that you have a good credit score.

1. Millions of people don’t have a credit score

Don’t be one of them. By default, you don’t have a credit score if you don’t use credit. It’s very important to build your credit history and use credit cards (responsibly) as opposed to cash or debit cards all of the time. In order to have a FICO credit score (the most common credit scoring system), you need to achieve these attributes:

  • At least one account opened for more than 6 months
  • At least one account that’s been reported to the credit bureaus within the past 6 months
  • Have no indication of being deceased on the credit report (this is rare, but mistakes can and sometimes do happen)

2. You have more than one credit score

There isn’t a single source of truth when it comes to credit scores. In fact, there are 3 major credit bureaus: Equifax, Experian, and TransUnion. Each of these bureaus maintains their own score for every consumer that it knows about (so again, you need to have used credit to get on their radar). Therefore, you will have 3 different credit scores, each of which will most likely be slightly different from the other 2. Some lenders look at just 1 score, while others look at 2 or 3 of these scores. Because of this, it may be worth spending the money to know what your score is from all 3 of these credit bureaus. Mortgage lenders will look at all 3 scores and take the middle score to figure out whether you qualify for a loan with what percentage interest.

3. Not using your credit can lower your credit score

Just because you have credit cards open doesn’t mean that you can just stop there. It’s important to keep your credit usage active so that you have a history of making payments on time. This might seem slightly counterintuitive because generally, the lower your credit utilization, the better your credit score. Yet, a 0% credit utilization does not help and may even hurt your credit score. The sweet spot is getting to a very small, but non-zero, utilization rate. It helps to keep even a small credit card balance on one or more cards.

4. Bad credit can be fixed

If you feel your credit score is lower than you want it to be, don’t fret. There are many things you can do to improve your credit score. Negative information is typically dropped from your credit report completely after 7 years, and the impact of those negative marks will have less of an effect on your credit score over time as you generate more recent history of on-time payments. There are some exceptions. Bankruptcies will stay on your credit report for 10 years, and unpaid tax liens will stay on your credit report for 15 years.

For more tips on how to repair your credit, view our 2017 Guide to Credit Repair.

5. Checking your credit doesn’t impact your score

You’ve probably heard that credit inquiries hurt your score, so why are we saying it doesn’t impact your score? There’s actually a difference in types of inquiries. There are “hard” inquiries, which occur when you apply for new credit such as a loan or a credit card. These can impact your score, so it’s best not to, for example, open up too many new credit card accounts at once. Then, there are “soft” inquiries, which occur when you check your own credit or even when a credit card company wants to pre-screen you for a credit card offer. You’re also entitled to a free credit report every year, so not only does it not impact your score, it can be free too!